KBRA Affirms Ratings for OceanFirst Financial Corp.

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, the preferred shares rating of BBB-, and the short-term debt rating of K2 for Toms River, New Jersey-based OceanFirst Financial Corp. (NASDAQ: OCFC) ("OceanFirst" or "the company"). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A- , the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for its subsidiary, OceanFirst Bank, N.A. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings recognize the evolution of the OceanFirst franchise over the years, which has seen the company grow from its heritage as a thrift in its legacy markets in Central and Southern New Jersey into a more diversified regional commercial bank that has a presence in six different states across the Mid-Atlantic and Northeast, as well as some of the largest MSAs in the country. This shift in strategy has been executed by an experienced and knowledgeable management team, which has the company well-positioned for future balance sheet growth, notably through the strengthening of its C&I lending capabilities, as well as the addition of its premier banking teams, both of which are expected to provide favorable lending and deposit relationships and facilitate opportunities for improved earnings performance over time.

KBRA also acknowledges OCFC’s favorable core deposit base, which comprises the majority of total funding and is supported by respectable market share in its home state of New Jersey, granularity, and a favorable mix, including 56% of deposits being transactional accounts. This deposit profile contributes to respectable deposit costs (2.06% in 1Q25) despite operating in highly competitive markets. While the higher interest rate environment has pressured margins and returns, this is largely attributable to OCFC’s concentration in CRE and residential mortgage lending, which is largely fixed or adjustable-rate loan structures. As such, there have been fewer repricing opportunities, which has resulted in average loan yields that track ~70 basis points below peers. However, over time, the company is well-positioned to improve its NIM through continued loan maturities and rate resets, incremental loan growth in higher-yielding segments, and the potential de-leveraging of higher-cost borrowings and time deposits as liquidity flows in from newly added banking teams. Additionally, KBRA notes that revenue remains primarily spread-driven, with limited fee income. That said, we view positively the strengthening of certain fee-generating business lines, notably mortgage banking, which offers a natural hedge against potential NIM compression in a declining rate environment, given the bank’s modestly asset-sensitive balance sheet.

OCFC's ratings are also supported by the consistent history of strong credit performance that has been evidenced through multiple economic cycles (NCO ratio averaged 15 bps since the start of 2008), which is supported by a lower risk loan portfolio that includes conservative underwriting, as well as a credit focused management team with comprehensive knowledge of local markets and borrowers. That said, KBRA recognizes that the company reflects a slightly elevated exposure to investor CRE (365% of total risk-based capital at YE24), including an above average concentration in office lending (10% of loans). However, we believe that the portfolio is well diversified geographically, relatively granular, reflects disciplined underwriting metrics, and includes a minimal exposure to central business districts, with a resilient tenant base that is largely comprised of credit tenants and the medical services. Moreover, the repricing analysis demonstrates a vast majority of investor CRE loans continue to reflect solid DSCRs when repricing to market rates.

While we acknowledge that risk-based capital metrics, such as the CET1 ratio (11.2% as of 1Q25), have trailed peers, we understand this in the context of the company's perceived lower-risk credit profile. That said, OCFC's more conservative capital management posture in recent years, particularly in light of the uncertain operating environment, has been viewed favorably. Looking ahead, the potential for more robust balance sheet growth in 2025 may put some pressure on capital ratios. However, management is cognizant of this dynamic and has indicated a willingness to adjust capital deployment accordingly, including limiting share repurchases and potentially raising additional capital if market conditions become more favorable.

The balance sheet reflects higher leverage relative to peers, with a loan-to-deposit ratio of 100% as of 1Q25. However, the liquidity position appears adequate, supported by stable deposit flows, strong uninsured deposit coverage, and sufficient access to liquidity sources. Notably, total liquidity sources cover uninsured deposits by more than 2x, underscoring the ample access to liquidity and the overall granularity of the deposit base. While liquidity risk remains a key focus following the bank failures in 2023, KBRA notes that OceanFirst’s deposit base demonstrated resilience during that period of volatility and throughout its operating history. Furthermore, anticipated deposit growth from the company’s premier banking teams, which are expected to provide deposits between $2-$3 billion over the next 2-3 years, is expected to more than offset any potential unexpected outflows.

Rating Sensitivities

A rating upgrade is unlikely in the intermediate term, but over the longer-term, execution of OCFC's strategic plans, including greater scale, stronger earnings and fee income, and a more conservative stance with capital would be viewed favorably. A rating downgrade is not expected, though deterioration in credit quality, unexpected liquidity or earnings challenges, or a more aggressive approach to capital management could potentially pressure the ratings.

To access ratings and relevant documents, click here.

Methodologies